Friday, April 28, 2006

Gas Price Pains: What NOT to Do With the Tax Law 

They're at it again. Members of Congress, that is. Here come more ideas to add to the long list of "are you kidding me?" proposals to deal with the inevitable run-down of worldwide oil and gas supplies showing up in the widely-reported gasoline price increases. The latest "solutions"?

Sen. Bill Frist wants the government to send a $100 cash "rebate" to unmarried taxpayers earning less than $125,000 and married taxpayers earning less than $150,000.

From Rep. Steve Chabot comes H.R.5203, intended "[t]o amend the Internal Revenue Code of 1986 to allow individuals a credit against income tax of at least $500 to offset the cost of high 2006 gasoline and diesel fuel prices."

How does either one of these proposals do anything to increase the supply of oil and gasoline or decrease demand? If anything, these proposals mask the crisis, and lull people into thinking that there's no need to take seriously the growing chorus of warnings about the energy supply disruptions looming ahead. The rebate proposal makes even less sense because it will be sent to people who don't purchase gasoline and thus don't have any purchase price to be rebated. It also makes no sense because it would provide the same amount to someone facing $200 of additional annual gasoline costs and someone facing $500 of additional annual gasoline costs. Frankly, it appears to be nothing more than a bribe, an attempt by nervous politicians facing elections in November to win votes from an electorate they have served poorly with respect to the energy issue for quite some time. The credit proposal is worse, in terms of dollar amounts and in terms of creating another tax return "entitlement."

Notice how, once again, Congress turns to the tax law to deal with a problem. One proposal would add yet another credit to the Internal Revenue Code, but because no bill language is available at the moment, it's tough to say how complicated it would be. The other proposal uses tax return information to generate the list of those who would receive rebates, and, again without specific language available, probably will use the IRS to administer the program.

If the tax law must be used to "solve" the problem, why not attack the causes? There already exist a variety of credits in the tax law for doing things that conserve fuel and energy. Expand those provisions. How about a credit for the purchase of a bicycle, manual push-mowers (provided the gasoline mower is traded in), or even brooms (if the gasoline-powered leaf blower or snow blower is surrendered)? How about a credit of $5 for every 100 miles of reduced driving, measured by comparing 2005 mileage with 2006 mileage and verified by the odometer readings taken by states for purposes of vehicle inspections? Indeed these could be complicated provisions, but so are the rebate and credit proposals, and if there's going to be complication, it ought to be for something worthwhile that mitigates the demand for energy rather than enable the addiction, to borrow a word from the President's State of the Union speech in January.

I shared some of my other ideas in Wednesday's posting. Strange, isn't it, that politicians aren't paying much attention to it. It makes sense, but it might not win votes. [begin sarcasm]Proposals that make sense but don't win votes? That's no way to run a country, is it? [/Sarcasm over]

Wednesday, April 26, 2006

Tax and Other Solutions to the Gasoline Price Reality 

The recent furor over rapidly escalating gasoline prices, which has been widely reported in stories such as this one, has generated an interesting assortment of "solutions" none of which address the underlying problem and none of which will make a difference. Not surprisingly, the word "tax" pops up in many of these fanciful schemes.

The core problem is fairly simple. Gasoline is refined from crude oil. There is a finite supply of crude oil, and as the easiest-to-extract oil is rapidly exhausted, the remaining oil becomes more expensive to find and to extract. Many of the places on the globe where oil is abundant are beset by political and military unrest that interferes with the exploration, drilling, and extraction functions. There is a shortage of refinery capacity. Demand for oil and oil products is rising, in part because the economies of developing nations are shifting to oil-fueled activity and in part because the population of the planet is increasing.

None of this is or should be a surprise. I provided a lengthy analysis back in October. I even predicted that gasoline prices and related issues would be factors in the 2006 and 2008 elections. Yes, I admit, that wasn't a difficult prediction, nor have I been alone in making it.

Before looking at the proposed solutions and explaining why they won't work, I want to ask a question. Why are people angry about rising gasoline prices? I can understand worried. I can understand anxious. I can understand puzzled. But anger? My only sensible guess is that people who think they are entitled to cheap gasoline feel offended because someone, somewhere, somehow, is trampling on their entitlement right. The irony in all of this is the fact that gasoline prices in this country are cheaper than they are in most other countries, the gasoline tax is lower than it ought to be because it has not been adjusted for inflation, and the real-dollar inflation-adjusted price of gasoline is not at an all-time high. What we have here is further proof of what happens when people are spoiled and then reality crushes the pretensiveness of fantasyland.

So let's examine the "solutions" being tossed about. Do they work or are they simply soundbites with emotional appeal? These are in no particular order.

Solution number one is the imposition of a windfall profits tax. This is a counter-productive measure and there is a track record to prove that assertion. Every dollar taken in a windfall profits tax gives energy companies an excuse to invest one less dollar in exploration, drilling, extraction, or development of alternative fuels. The tax would also mean lower investment returns for pension and profit-sharing funds holding energy stock, and for retirees living on the dividends paid by energy stocks. There was a windfall profits tax in the late 70s and it is one of the reasons that today there is insufficient refinery capacity, insufficient refining reserves, and less exploration and development than there could have been. Perhaps if "profits" were defined to include a reduction for these expenditures the perception that energy company profits are "too high" would shift to something more reflective of an understanding of basic accounting.

Solution number two is to pressure Saudi Arabia to release more oil. Unless the proponents of this solution have information not available generally, Saudi Arabia not only is pumping oil at a maximum rate, it faces the prospect that one of its major fields is on the brink of "pumped almost empty" collapse. Take a look at the many discussions of this issue on The Oil Drum, a peak oil site with one of the highest signal-to-noise ratios of any public forum website I've visited.

Solution number three is to open up drilling in the Arctic National Wildlife Refuge. Even if environmental damage can be minimized, and it almost surely can be, this is the equivalent of putting a band-aid on a heavily bleeding gash. Who's to guarantee that opening up ANWR or drilling in the continental shelf areas presently closed by law will not trigger output reductions by Venezuela, Russia, Saudi Arabia or other producing countries?

Solution number four is to boycott Exxon-Mobil. This is one of the most ridiculous ideas circulating on the Internet, unless the boycotters plan to reduce their gasoline purchases rather than buy at another supplier. What happens if no one goes to Exxon-Mobil stations? They go to other stations, those stations raise prices because demand at their sites has increased, they purchase the gasoline that Exxon-Mobil has available, and prices go up even more. When I read things such as the "boycott Exxon-Mobil" proposal it causes me to wonder not only about the widespread ignorance of economic theory prevalent among the citizenry, caused, of course, by deficiencies in high school and undergraduate education systems, as discussed in this previous post, but also about the dangers inherent in a democracy that theoretically permits a population to vote for policies that constitute national suicide.

Solution number five is a proposal to increase competition in the oil and gas industries. Legislation to this effect has already been introduced in the Congress. The end result, I suppose, would be the dismantling of large energy companies. We would be left with many small energy companies. Could these companies bring sufficient resources to explore and develop high-cost deep-sea fields, which are one of the last frontiers in the search for conventional oil sources? I don't know. Years ago, it was decided to break up AT&T. What happened? It has re-emerged.

Solution number five is a proposal to authorize an FTC investigation to determine if there has been price gouging and price fixing. This is a recycled idea. None of the previous investigations turned up any evidence of price fixing. I doubt this one would. Gasoline stations operate on a narrow margin. The truck arrives, drops its load into the tanks, and gives the owner an invoice. The owner looks at the price, figures out the fixed costs of running the station, and increases the retail price. If asked why the price increased, the wholesaler points to the mandated use of more expensive ethanol, the costs of cleaning tanks and tankers so that the ethanol, which is highly prone to water and dirt absorption, is not fouled. And no matter the outcome, these investigations would do nothing to increase supply or reduce demand, or to generate production of alternative fuels. Nonetheless, the President has ordered the investigation to proceed.

Solution number six is to take oil out of the Strategic Reserve. Here's another absurd idea. There's a saying among farmers, probably lost in a post-modern world in which too many people think food is "made" at the grocery store: "don't eat the seed corn." What's the point of exhausting the reserve when doing so might reduce prices by a penny or two per gallon for a short period of time? Other than, of course, getting attention for the politicians who spout this nonsense. Perhaps this is why the President has ordered a suspension in replenishment deposits to the Reserve, a move that does little to affect the supply, does nothing to reduce demand, and will do nothing to affect prices. Yes, it looks good. So does a painted-over rusty pipe.

Solution number seven is to suspend the gasoline tax. Yes, yes, finally, it's a tax issue. I've explained the counter-productivity of this idea so many times that I will simply point to my previous posts on the subject: September 2005, March 2005, another one from March 2005, May 2004, and March 2004.

Solution number eight is to cap sales taxes on gasoline, a proposal already underway in New York. Yes, another tax matter. This one is interesting. If gasoline prices rise 50 percent, the sales tax increases by 50%, creating windfall revenue for the state. Holding the sales tax at the amount payable on the lower, pre-increase, price would not deprive the state of tax revenue as would a suspension of a fixed gasoline tax. Of course, this solution only works in states that have a percentage-based sales tax on gasoline. My guess is that because it involves a few cents, it won't cool down the anger that many drivers are feeling about gasoline prices.

Solution number nine is to require auto-makers to manufacture fuel-efficient vehicles and alternative fuels vehicles. This is a wonderful idea, ten years ago. It might make things easier ten years from now, when gasoline is at $23 per gallon. As a short-term solution, it is useless. As a long-term solution, better late than never. Of course, where are the almost-bankrupt American automobile manufacturers going to get the capital to invest in making these changes?

Solution number ten is to repeal the recently-enacted tax breaks for energy companies. This is an appropriate thing to do because these companies don't need tax breaks. So it should be done. But let's not fool ourselves into thinking that it has any effect on supply, demand, or price.

Solution number eleven is to temporarily set aside EPA requirements, presumably to mitigate the impact of the switchover to ethanol. This action, already ordered by the President, will alleviate the spot shortage problem, but won't do much to change the price. It's a stop-gap and a band-aid. And, of course, it means somewhat dirtier air.

If it seems as though there is no easy solution, that's because there isn't. I'm not alone in reaching this conclusion. Folks posting at the Oil Drum have been pointing this out for quite some time. And at least one politician, Representative Bob Beauprez, even so stated, a remarkably honest and courageous but politically risky comment.

Why is it risky? Americans don't want to hear bad news. Perhaps that's why Americans are angry. Deep down they know that upheaval looms. It will not be life as usual. Gasoline prices, like oil prices, are not going to return to 1995 levels. Or 2002 levels. They are going up, up, and away. When one considers the changes that must be made, it's no wonder many Americans are distressed, frustrated, scared, and thus, yes, angry.

What are those changes? In other words, what are the near-term solutions? Forget about hydrogen cars available in 2012, or some alternative fuel developed for production in 2015. Forget about coal-to-liquids that might be feasible by 2014. Focus on 2006. On 2007.

Let's start with the easy ones. The ones many people don't do because they don't think of it, don't have time, are too lazy, or otherwise don't think it matters. Perhaps if people understand that the fewer easy steps that are done the sooner the more difficult steps will be compelled, they will pay attention to these things.

First, cut back on speed. I'm not talking the 40 mph on an Interstate nonsense or the people doing 50 in the left lane of a 65 mph highway. I'm talking speeds of 60, 65, 70. Yes, at 65 and 70 fuel economy generally is not the best for many vehicles. I'm talking about the clowns who go by at 80, 85, 90, not on wide open western highways but on urban freeways. Not only are they a safety menace, they are squandering a scarce resource. For what? To go 15 miles in 42 fewer seconds? And where are the highway troopers? Is there a shortage of police? A shortage of radar? Huh?

Second, properly inflate tires. Easily done, though I do know more than a few people who do not know how. Sad. Here's another "subject" that should be taught in high school. The 10-minute, no-credit course.

Third, keep the car engine properly tuned. Most vehicles have sufficient warning lights and other indicators to alert the driver that something is wrong or that it's time for maintenance. With gasoline prices at $3 a gallon and headed higher, the cost of the maintenance will pay for itself.

Fourth, fix traffic signals so that they are fuel-efficient. What's the point of stopping traffic when there is no cross-traffic? What's the point of stopping traffic when the vehicle that triggered the "turn the light" sensor has already made a right turn on red and is no longer in need of a turn in the light? What's the point of programming a light to stay green for at least 90 seconds when there is no traffic needing the green and there are cars sitting at red lights? Remember, most vehicles get 20 to 30 miles per gallon when they are moving. The reason many vehicles get overall mileage ratings of 16 or 18 or 22 is because EVERY VEHICLE GETS ZERO MILES PER GALLON when sitting at a red light.

Fifth, combine errands. Eliminate the impulse, one-item rush to the store trip.

Sixth, let the children ride bicycles to soccer practice, and to school. Walk where possible. This will require installation of sidewalks and bike paths in places that are dangerous for bikers and walkers, but let's get it done.

Seventh, use manual lawn mowers instead of gasoline-powered machines. Use brooms, not gasoline-powered leaf blowers, to clear leaves from driveways. Use snow shovels, not snow blowers. And welcome the beneficial side effects of exercise, weight loss, and the good feeling that comes from natural endorphins.

Eighth, turn up the thermostat when using air conditioning and turn it down when using heat. The savings in natural gas and electricity consumption will translate to lower oil prices.

Ninth, for those understandably upset with the huge amounts of compensation, pension, and severance payments made to energy company executives, write to Congress and urge it to pressure the IRS to enforce the "reasonable" part of the restriction on business expense deductions for compensation. I wonder if the amounts being paid will change if they are not fully deductible. Of course, this isn't going to make a difference in supply, demand or price, because the compensation of Exxon-Mobil's CEO, apportioned over the gallons of gasoline it sells, is a fraction of a penny.

So these are the things that can be done in the short-term, without the need for legislation, government investigations, or other "let someone else fix it" approaches to the problem. There's a very good analysis of these and some not-so-short-term lifestyle changes (such as moving closer to work) that's well worth the read.

I conclude with a challenge toward those who think that windfall profits taxes on energy companies is the answer. Are you willing to apply the tax to all companies? Will the measure be profit percentage? In 2005, Exxon-Mobil earned a whopping 36.1 billion dollars of profits on 328.2 billion dollars of revenue, for a net profit margin of 11%, as reported by MSN Money Central. By comparison, also according to MSN Money Central reports, Microsoft earned a "mere" 13.1 billion dollars of profits on 41.4 billion dollars of revenue, for a, yes, 31.6% net profit margin. Folks are upset about a company earning 11 cents on the dollar, while another company earns 31 cents per dollar? The irony is that the gasoline supplied by Exxon-Mobil almost always works as promised. The stuff supplied by Microsoft is buggy, security-deficient, poorly planned, and poor in quality. Does Microsoft escape scrutiny because it "buries" the cost of its product in the cost of a computer? Maybe Exxon-Mobil ought to work out an arrangement with the car dealers: buy a car, gasoline comes with it. The cost? Oh, an additional $7,000. Clever, no? Note that Microsoft is not the only non-energy company hauling in profits at rates multiple the Exxon-Mobil rate. Microsoft, though, is a good counterpoint because it's big, it's intrusive, and its products are far from excellent. So why are people yelling about Exxon-Mobil and the other energy companies and saying so little about Microsoft? Are the folks who want to break up the half-dozen large oil companies that dominate the domestic gasoline market willing to break up the only large software company that dominates, no, totally controls, the domestic software market?

What a marvelous test of consistency, logic, and common sense. It will be interesting to watch this story develop. Trust me, it's still in the first chapter, and it's going to get much, much worse.

Oh, and just to add fuel to the fire (ha), let me propose another way to reduce demand. It's one of my favorites. Impose a user fee on energy users for the cost of using the energy. Translated, increase the gasoline tax to reflect inflation since the last time it was increased. Then let the market adjust. Otherwise, it won't be too long before there is rationing, empty gasoline stations, stranded motorists, and chaos to make the crisis of the late 70s look like a mere warm-up.

Monday, April 24, 2006

Tax Consequences of Home Makeovers: Does the IRS Read MauledAgain? 

A little more than a year ago I shared an analysis of the tax consequences of home makeovers experienced by families whose applications were accepted by one of the several network television home remodeling and reconstruction shows. Some of my arguments were responses to contrary or alternative analyses offered by subscribers to the ABA-TAX listserv. Two days later I posted a follow-up to respond to questions posed directly to me by a nearby CPA.

Here's the gist of what I concluded: The recipients have gross income because (1) it is income, (2) no exclusion, including the section 102 gift, and section 280A(g) de minimis rental, and section 109 leasehold improvement exclusions, applies, and (3) it is a prize, the value of which is expressly included in gross income under section 74. I noted that it was unlikely the networks would pass up a substantial advertising expense deduction in order to preserve a gift exclusion for the recipients even if the networks could bring about such an outcome. I also noted that it would not be all that surprising if the IRS pursued the tax issues with the recipients, especially if the networks issued Forms 1099 and the IRS computers detected a mismatch. I also predicted that "politicians, especially the 'eliminate the IRS' crowd, would jump all over this" issue.

Thanks to Paul Caron's TaxProf Blog, I've become aware that the IRS recently released a September 2005 letter it had written to Representative Marsha Blackburn in response to her inquiry about the issue. The letter's release comes months after its transmittal because of the process required to delete taxpayer identities and other information.

It seems that a constituent of Rep. Blackburn wrote to inform her that the network producers were telling the makeover recipients that the value of the improvements and the cash paid by the networks are excludible under section 280A(g) and to request that Congress "close this loophole." Rep. Blackburn, as members of Congress often do in these instances, wrote to the IRS asking for an explanation.

The IRS response is a more succinct version of what I posted back in March of 2005. The letter states:
Section 61 of the Code provides that, except as otherwise provided by the Code, gross income means all income from whatever source derived.

Section 74(a) of the Code specifically provides that gross income (as generally defined in section 61) includes amounts received as prizes and awards. Under section 1.74-1 of the Income Tax Regulations, prizes and awards includible in gross income include, but are not limited to, amounts received from radio and television giveaway shows.

Section 280A(g) of the Code provides, in part, that if a d welling unit is used during the year by the taxpayer as a residence and is actually rented for less than 15 days during the taxable year, then the income from such rental is excluded from the taxpayer’s gross income.

To the extent that the value of the improvements constitutes a prize or an award, however, it cannot also be considered rent, and therefore could not qualify for the exclusion from gross income under section 280A(g) of the Code.
What the IRS did not ask is how the transaction could be anything other than a prize, as I pointed out in my earlier post. Nor did the IRS disclose if it has audited any taxpayers on this transaction, though it did point out in the letter that it is prohibited by law from disclosing that sort of information.

The temptation to gloat is real, but I'm trying to shove it aside. I'm more concerned about the bad tax advice that network producers are giving to the prize winners. Actually, I'm even more concerned about the bad tax advice the network producers' attorneys or other advisers are giving to them and, directly or indirectly, to the prize winners. If the networks want kudos for doing the wonderful things they are doing for the folks in need of home makeovers, they should be thorough and make certain that the winners have sufficient cash with which to pay the federal and state income tax liability arising from the prize. Anything less would make the seemingly marvelous gesture somewhat hollow.

And here's a wish that none of the folks telling the winners that they have no gross income are former students of mine. Maybe they're graduates of law schools higher in the U.S. News rankings and next year adjustments will be made to reflect this impact on law school reputation? Yes, that was sarcastic, it was intended, but in light of Friday's post too difficult a jibe to resist.

Friday, April 21, 2006

Ranking Law Schools = Selecting the Most Attractive = Fruitless Impossibilities 

It's that time of the year again. Yes, it's law school ranking season. After U.S. News and World Reports issues its compilation, the critics and analysts jump in, with no shortage of comparative charts to extract, things not to like, suggestions and questions on what law schools should do to improve their position, and alternative ways of measuring a law school's position in the hierarchy. It is indeed unfortunate that prospective students, and others, give any deference to the fact that one school is ranked sixth and another fifth, a point nicely made by David Bernstein.

Paul Caron has posted summaries of the biggest jumps up and down in the latest rankings. Bill Henderson, in a Conglomerate analysis questions the emphasis placed by law schools on cranking out more and more scholarship when his comparison of the numbers indicates that law schools rarely move much from year to year in the U.S. news rankings despite the shift in emphasis to scholarship. Dan Filler, in his Conglomerate post compares the newly released rankings with those from 1995 and 1998, and concludes that little movement occurs in the academic reputation component of the U.S. News rankings. An interesting de-cluttered version of the U.S. News rankings has been compiled by J. Gordon Hylton. But those in turn have been criticized, as in this review by Andrew Morriss andthis followup.

Brian Leiter, in his comparison of reputation rank with overall rank, discovers several "oddities" with the explanation perhaps resting on things such as public v. private status, size, and expenditures. Dan Solove, in his Concurring Opinions take on rankings labels the U.S. news rankings as "stupid" but then gives the editors credit for coming up with a magazine-selling gimmick that ends up influencing legal education because law schools play along rather than develop alternatives.

Dave Hoffman, in a Concurring Opinion pieces asks law school deans to identify where the money should go: scholarship? facilities? marketing? scholars? Alfred Brophy concludes that the money should be spent on law journals, because he has determined that as the number of citations to a law school's journals by other journals increases, the school's position in the rankings similarly begins to rise.

Speaking of alternatives, Brian Leiter has an extensive system in place which uses different factors and different weights. Whether or not one agrees with his methodology or results, one must admire someone who does more than gripe by trying to create something better. David Bernstein shared his idea at The Volokh Conspiracy that publishers from every corner should do law school rankings. Yet Ann Althouse questions whether Princeton Review's competing rankings can dislodge U.S. News.

An interesting discussion has gotten underway between those who think citations to a law school's journal is indicative of some component of quality, and those who prefer using statistics on downloads from SSRN, as nicely explained in this post by Alfred Brophy. Brian Leiter, among others, has carefully explainedthe flaws of using SSRN as a measure of too much.

Personally, I think the entire business of ranking law schools is not only stupid and silly, but dangerous. Graduates of allegedly top-notch law schools have been known to be professional failures in all sorts of ways. Graduates of schools ranked in the lower tiers, shunned by the supposed elites when it comes to hiring faculty, have joined the ranks of successful lawyers, business entrepreneurs, public servants, and law reformers. As I was told years ago, once someone is more than a few years out of law school, what counts among practitioners, and should count among academics, is what the person has accomplished. If rankings are defended as useful to employers of law graduates, my response is that employers need to find better ways to evaluate talent.

If, however, rankings are to exist, and I admit that they surely will continue to be published, then the metrics need to be fixed. The idea of using SSRN data disturbs me. It measures very little that is informative to the legal profession. SSRN data measures a very, very narrow bundle of a certain type of legal writing. It does not measure legal writing directed to the legal profession. It omits scholarship not published in student journals, though some elites think that the only writing that can be classified as scholarship is that which is published by third-year students who know little or nothing about what the legal profession needs to read and who rarely can get anything published in a timely manner. In specialized fields, where practicality must trump the philosophers, timely publication in professional journals is the mark of someone making a contribution to the law that should be reflected in the reputation of the author's institution.

In some ways, the debate between those advocating SSRN download counts and those tallying law review citations to other law reviews are living in a very isolated and increasingly irrelevant world. It is 2006. Law is being discussed, analyzed, and influenced not only by professional publications but also by blogs, listservs, wikis, and a variety of other channels that are at least as indicative, if not more indicative, of quality reasoning, excellent writing, and outstanding teaching.

Think about it. The debate concerns the ranking of law SCHOOLS. Yet rather than measure the effectiveness of the teaching, the evaluators put much of the emphasis on a very narrow slice of legal scholarship. SSRN and law review citation counts might be helpful in rating think tanks. Law schools should be, and are, much more than think tanks, though during the past two decades they have slid precariously away from their primary mission as the race to "out-Harvard" Harvard (or is it "out-Yale" Yale?) shifts faculty time and resources from innovative teaching to running in place on the "convince third-year students to publish you or forget about tenure" treadmill.

The true measure, though admittedly tough to get, is what judges, lawyers, and clients think of a school's graduates during the three-to-five-year window of law practice following graduation. Why 3 to 5 years? By the time someone has been in practice for 6, 7, 10, or more years, that person's reputation and accomplishments are no less a function of the mentoring and education experienced after graduation than they are of the school from which the person has his or her J.D. degree. Surely bar examination pass rates matter, though many law schools usually claim they aren't "teaching for the bar." Assuming bar exams are decent gateways for determining who can practice law, then what are law schools "teaching for?" Well, I've been told that law schools exist to train legal philosophers. Excellent. The world is just craving more legal philosophers. There's such a shortage, they command such salaries, it's amazing that anyone can find some to hire. Sorry for the sarcasm, but if there's something the world doesn't need, it's more legal philosophers.

Yes, even if everyone agreed that the metric should be a reputational evaluation of law school graduates in the few years after graduation, it is unlikely agreement could be reached on how to measure it. That's very true. Yet it also proves the stupidity and silliness of ranking law schools. Every law school in this country offers a quality legal education. Law schools should strive to be different rather than trying to fit the U.S. News (or any other rank maker's) mold. A school that emphasizes trial litigation preparation very well could be the ideal place for a gifted applicant who could qualify for admission to an elite school but whose goals are consistent with the education offered by the school focusing on litigation. In other words, what's a fine school for one person might be an inappropriate place for someone else. The notion that LSAT scores, undergraduate GPAs and similar predictive characteristics should match in lock-step with the hierarchy of law school rankings is nonsense.

The law school ranking business, unlike hierarchical sortings that reflect objectivity, is absurdly subjective. The outcome of the rankings is no different from those lists of "most beautiful women" or "most handsome men" that certain magazines and newspapers publish. Yes, someone could do metrics on distance between eyes, degree of eye roundness, curvature of cheekbones, density of hair, shape of nose, and other things that some researchers claim predicts "attractiveness" but ultimately I may think beautiful someone you think plain, and vice versa. Even if we might agree generally on categorization, trying to pick between two people who are similarly attractive is like trying to decide if Harvard or Yale is the better school.

And, ultimately, who cares? No one cared until the editors at U.S. News found a money-making gimmick, disservice that it is to the nation. I surely don't care. Nothing in the U.S. News rankings is affected by or affects the quality of, or demand for, my writing, my blog posts, my listserv messages, or my courses. And I do hope that the rest of the law faculty in this nation can adopt the same attitude. Do what is right, and don't sell out to the rankings game.

Wednesday, April 19, 2006

Laugh, Laugh, Tax is a Joke 

Thank to KC Jenkins, a regular participant on the ABA-TAX listserv, my attention has been drawn to an extensive collection of tax cartoons. They range from mildly amusing to downright hilarious.

Now that "Tax Day" is behind us, it's time to laugh about it, no? It's always time to laugh about taxes. What other productive choices are there?

For years, I have cut cartoons and comics from the papers and have posted them outside my office door. See, I'll do anything to prevent people from zooming past "the tax place." This practice inspired students and a few faculty to bring me cartoons they had clipped from newspapers and magazines that often I had not seen. There are now so many cartoons on the wall that I had to consider renting wall space from my colleagues who don't post things. Yes, even though many of us post assorted things outside our doors, a few don't.

But now, I suppose, the digital revolution has caught up with Maule's Wall of Tax Funnies. So I expect that over time the wall will have fewer additions. And I suspect that when we move into the planned-for-many-years-will-it-happen new law school building, we might find ourselves prohibited from defacing the decor with humor, political commentary, announcements or any other sort of posting. And how could I complain, when digital bulletin boards have existed for years to serve the same purpose?

P.S. Don't blame me if the boss gets upset that you're spending your time reading through all of those tax cartoons at the cagle site. Just don't laugh so hard that the boss comes by to see what's funny. Unless, of course, the boss appreciates tax humor.

Another Tax Chart: In Design Stage 

Tax days may come and go, but Andrew Mitchell's tax chart production hums right along. The April 2006 entry is "a draft flowchart that deals with multi-step reorganizations where stock is acquired and then the Target corporation is merged or liquidated." Andrew welcomes comments on this particular chart, particularly as it is in draft form. Visit his site, and contact him through that portal.

There are three ways to access the overall chart collection:
By Topic
Alpha-numeric order
Date uploaded
If you haven't read my previous accolades for Andrew's charts (see here, here, here, here, here, here, here, here), and here, take a look. As those who have followed my endorsement of Andrew's tax law visualization efforts know, I and others (e.g.,here) hold them in high regard.

Monday, April 17, 2006

Blawg Review #53 

The folks at Blawg Review graciously invited me to host the Carnival of Law Bloggers for what many people call “Tax Day.” It is an honor, a privilege, and a serious responsibility to host a Blawg Review. I welcome the opportunity and hope that you learn as much reading this post and checking out the blogs that I mention as I did putting this post together. Don’t worry, serious responsibility does not mean I stop trying to bring smiles to my readers’ faces from time to time.

Every Day is Tax Day

People are calling April 17 “Tax Day” because April 17 is the day federal income tax returns are due this year because April 15, the usual deadline, falls on a Saturday. Although it is possible to get an automatic six-month extension of time to file the return, the tax liability continues to be due on April 17.

Every year, the Tax Foundation calculates what it calls Tax Freedom Day. This year, we’re told by its 2006 report, Tax Freedom Day arrives on April 26. The day is calculated by assuming a person’s earnings are devoted entirely to taxes until the year’s tax liabilities are paid, and that from that day forward whatever is earned is retained by the taxpayer. Tax Freedom Day for 2006 is the 116th day, three days later than in 2005 and 10 days later than it was in 2004.

It is deceptive, though, to consider any day free of taxes. Every day during which a person engages in a transaction, a tax is not far behind. Sales taxes. Real estate transfer taxes. Use taxes. Telephone taxes. Tire excise taxes. Occupation taxes. Emergency services taxes. Inheritance taxes. Gift taxes. Estate taxes. Income taxes. Every day, every year. Does anyone want to write a screenplay for “Tax Takes a Holiday”?

Tax Is Pervasive

So it’s readily apparent that a chief characteristic of taxation is its pervasiveness. It is difficult to describe an area of law where one can practice in blissful ignorance and delightful disregard of tax. Yes, there are a few narrow niches, and every area of law has a few topics that can be researched and argued without consideration of taxation, but eventually tax, whether federal, state, local, or international, will pop up with a cheery hello.

Tax is everywhere. I challenge my students to generate hypotheticals in which tax is not casting a shadow on the transaction. There are tax issues waiting for us in birth, education, business, employment, gifts, marriage, travel, hobbies, politics, religion, shopping, and yes, even death.

As a professor of law who devotes a majority of teaching time to tax, I require myself to engage in a continuous updating of what is happening in the world. It is from the world that we who teach tax gather our hypotheticals. To quote myself and my colleagues, “We don’t need to make up this stuff.” Or to paraphrase what a Philadelphia Inquirer columnist once noted about my approach to teaching tax, I see tax everywhere I look.

So let’s begin by looking at some blog commentaries on recent developments in the law that implicate tax issues. Sometimes the commentator notes the tax questions, but often it’s left for the tax explorers to discover.

Over at the WorkPlace Prof Blog, we find a report on the Ninth Circuit’s upholding a three-judge panel’s conclusion that Title VII was not violated by a casino that fired a bartender “because she refused to comply with the casino's grooming policy requiring female bartenders to wear make-up.” If she had complied, would the cost of the makeup be deductible as an employee business expense because she otherwise does not use it? I’m not going to answer this or any of my other questions because I don’t want to spoil all the exam possibilities that I and my tax colleagues can glean from these stories.

Many of the reports on the Sports Law Blog easily can be transformed into tax law exams. For example, when deciding the causes of action to list in the lawsuit planned by Barry Bonds, were tax considerations taken into account? I don’t know. But they’re there. Surely there are tax issues in treating athletes’ wagers as compensation.

The number of legal issues that can pop up when autos and other vehicles are manufactured, purchased, repaired, driven, sold, and scrapped are almost matched by the number of tax issues affecting wheeled conveyances. The interview with Prof. Stephen Bainbridge at AutoMuse about his, shall we say, fascination —he uses a different word— with fast cars is a must-read for all tax types with money to spend and a craving for rapid acceleration. I don’t understand why the interviewer didn’t ask the prof if there were any tax breaks entering into his purchase decision. I don’t think I’ve ever purchased or leased a vehicle without the word tax entering the conversation more than a few times.

Tax questions issues also thread through the litigation triggered by one economist’s assertion that the research of another economist cannot be replicated, as reported on Overlawyered. The tax consequences of the cost of pursuing and defending the suit, and the tax treatment of any settlement or court-ordered payments, surely hover over the parties. And, considering that economists have pretty much pushed the tax lawyers aside on the Congressional tax policy stage, perhaps a successful outcome of this lawsuit will have a chilling effect on tax policy debate. When’s the last time anyone duplicated the economic research used to justify tax legislation?

And when’s the last time legislatures did something with health care that didn’t involve an amendment to the tax law? Over at the Health Care Law Blog, the suggestion that RSS technology be used to facilitate rapid delivery of critically-needed health care information about patients may turn out to be a wise one. I don’t know enough to say. But I do know enough to predict that for it to gather steam in the legislature someone probably will lobby for a tax credit or tax deduction for implementing the proposal.

Speaking of health, Patent Baristas has a worthwhile article asking, “Are Tax Breaks for Biotech Worth the Price?” It offers good insights into the claims that tax incentives are necessary and, in fact, deliver dividends.

The Antitrust Review explains the FCC’s announcement about the procedures to be used for its auction of spectrum licenses for Advanced Wireless Services. The outcome of the process will have a significant impact on most of us. Wireless, like tax, is everywhere. OK, almost everywhere. Don’t think the tax planners haven’t been consulted about the details of the business ventures that are forming around the awarding of these licenses. I’d like to say they’re wired into the deal making, but I guess we’ll need to find a new metaphor.

Speaking of wireless, and why it will permeate our lives almost to the extent tax does, there’s a fascinating article on Law Practice Management about the use of a wireless service called location-based service (LBS, remember the acronym) that is touted as a way for parents to locate their children. Helpful but Orwellian, as the article explains, the technology will also permit employers to keep track of their outside employees. The legal issues arising from this development are myriad, but I can see one implementation, in the world of tax audits, that compels me to paraphrase the article’s title, “Do You Know Where Your Child / Employee Is?” to “Do You Know Where Your Tax Dependent Is?”

Over at the Mommy Blawg, an anonymous lawyer from Dallas keeps an eye on legal developments, and other events, affecting the joys and challenges of motherhood, including updates on laws affecting breast-feeding and mid-wifery. Taxes and motherhood? Yes, indeed. This is evident from the title of one of my early articles: Federal Tax Consequences of Surrogate Motherhood, 60 Taxes 656 (1982). The Mommy Blawg also delivered a nice reminder of how taking care of children is never that far from the casualty loss deduction: Things You Don’t Want to Hear Your 5-Year Old Say: “Mommy, I figured out how to get clothes down off the ceiling fan.”

Tax (At Times) Is Humorous

To help us remember that tax law is with us wherever we go, Jack Bogdanski, he of Jack Bog’s Blog, has embarked on a frightening and yet smile-generating project. According to his description of the enterprise, he plans to record his reading, yes, his reading, of the entire Internal Revenue Code. Because of the Code’s size, each section will be a separate file. Jack is thinking of bringing in celebrities. I think it would be fun to have members of Congress read some of their convoluted work product. I’d suggest having code sections named after legislators read by those honorees, but several already are dead, giving new meaning to the word “legacy.” Jack’s even threatening to put some of this to music. Does scraping one’s fingernails along a chalkboard qualify? It surely would be fitting.

In the “we tax folks don’t make these things up” department comes another report from the WorkPlace Prof Blog. This time it’s a reference to a report on the Future of Work Blog, explaining that a survey by Insight Express and SonicWALL disclosed that “[a]bout 39 percent of respondents of both sexes said they wear sweats while working from home, but 12 percent of males and 7 percent of females wear nothing at all.” Check out those posts for further commentary, and simply let me wrap it (ouch) in this tax concern: I guess for that latter group there’s no chance that they can qualify for a work uniform deduction?

Over at Joe Kristan’s Tax Updates, there’s a story about a taxpayer struggling to find the right words to describe her occupation on her From 1040. She is a foot fetish model. Joe gave his interesting write-up the sort of headline (or should that be footline) that I enjoy: “Does This Make Her a ‘Sole’ Proprietor?” I can’t imagine the taxpayer and the IRS going toe-to-toe over this issue, though she might get more than a few IRS employees to arch their eyebrows as they try to decide if listing one’s occupation as foot fetish model is instep with the instructions to Form 1040. OK, time to step along with the rest of this post.

If you really want to get into the world of tax jokes, stop by the Tax Guru and scroll down through the page. A variety of tax cartoons and other fun are sprinkled throughout the serious questions and answers shared by Kerry Kerstetter. It looks like the digital equivalent of the wall outside my office door.

But Some Tax Things Just Aren’t Funny

Sometimes, though, even humor won’t work to blunt the serious side of taxation. Tax reaches so thoroughly into every aspect of people’s lives that inevitably the laughter must fade.

The Empirical Legal Studies Blog took a look at The Polls–Modern Morals. Respondents were given ten behaviors to rate as “morally acceptable, morally wrong, or not a moral issue.” Coming in second, at 79%: not reporting all income on tax returns. What’s first? Go take a look. Getting mauled wasn’t a choice. Phew!

When challenged to identify an area of law where taxes barely register, many will respond “criminal law.” Wrong. Ask any state’s attorney general about the work of his or her office, and most of the time tax law enforcement will be included in the response. So it makes sense to keep an eye on theAG Watch. A recent post dealing with a legislative proposal in Massachusetts that would change the outcome of pending litigation raises an objection about ex post facto legislation that brings back memories of several similar situations in the tax world during the past several decades, one involving a retroactive increase in the tax rate and the other involving a retroactive imposition of a stricter limitation on an estate tax deduction. As tough as it is to change one’s business practices when laws are changed in the middle of a project, or even in the middle of a lawsuit, imagine how tough it is to change one’s estate plan after one dies.

Speaking of the estate tax, a theologian’s take on permanent repeal shows up on Mirror of Justice, in this report on Martin Marty’s juxtaposition of stewardship, fund raising, and politics. The posting on human endowment taxation deserves a look not just from tax practitioners but from anyone interested in current developments on the philosophical edge of tax and theology.

Yet When All is Said and Done, the Tax World is Rather Civilized

OK, so tax practitioners are viewed as, hmm, unexciting, as noted in this blog comment: “The people I work with have the personality of a tax lawyer raised by morticians,” surely not intended as a compliment.

Nonetheless, I’ve not seen in tax litigation the sort of news that we find on The Dark Goddess of Replevin Speaks. The Motion for Fist Fight in Montana Fourth Judicial District Court makes it easier to understand why boxing is not offered in LL.M. (Taxation) Programs.

And has there ever been a tax proceeding in which things got as unprofessional as they did in this deposition? Perhaps it’s good that tax types don’t take themselves too seriously.

What They Do With Tax Dollars is Just as Important

I’m going to guess that the blogging world probably pays more attention to government spending than it does to revenue collection. What governments do with tax revenues has a serious impact on how they tax, what they tax, when they tax, and who they tax. It’s more visible and it’s more easily understood.

We get a Pork list from Russ Fox of Taxable Talk. Pulling some extracts from Citizen Against Government Waste’s 2006 Congressional Pig Book, Russ draws our attention to some randomly highlighted entries, making it a bit easier to understand the attitudes of the people who simply don’t want to pay taxes. Check out Russ’ site and then wander over to the book itself. Don’t do this while eating or operating heavy machinery.

As if to drive the point home, the Club for Growth Blog reports that 80 percent of people asked in a recent poll about how Congress views tax revenues think that Congress Thinks Its Their Money. Well, duh, of course it does. It’s nice, though, to see that most Americans understand the problem. I think. In other words, somewhere the words “stewardship,” “fiduciary,” and “public trust” seem to have fled Washington.

When Deciding What to Bill, Don’t Forget the Income is Taxed

Over at f/k/a, a blog focusing on legal ethics, we are treated to an interesting comparison of value-based babysitter billing and value based legal billing. More on lawyer billing practices from the anonymous Greatest American Lawyer. Greatest? Has to be a tax planner. Or tax litigator. An interesting discussion on PointofLaw.com deals with the appropriateness of contingent fees. I like the idea that plaintiffs’ lawyers who avoided tax courses find themselves dealing with EV = F*Pr*D – C as they figure out whether to take a case and how to price their services. Tax may be everywhere but it has no monopoly on the use of numbers and formulae in the legal world.

In exploring the economics of law firms, Adam Smith, Esq. presents a post asserting that all law firms are unmanageable and that lawyers have serious issues with trust, the desire for autonomy, detachment, and decision making. And other professions don’t?

I wonder how much of this is driven by or drives the soaring salaries paid to associates. Another post from Adam Smith, Esq. exploring the reaction to these “handsome” amounts of compensation deserves a look, especially by people attracted to a career in law because of the dollars. Specifically, check out the last paragraph, and take note of the response offered by David Maister. Remember also, as nice as those salaries appear to be, a sizeable chunk doesn’t get taken home. One of the many great teaching moments in my basic tax class is the first day, when I show the students what happens to a “typical first-year associate’s salary” on the way to the bank. There are times the gasps are audible, leaving me to wonder how one gets to be 22 years of age without having learned the tax facts of life.

Surely if courts require personal representatives to hire lawyers to conduct the probate process, as reported in this f/k/a report, the ever-present need to find revenue won’t be as challenging for attorneys who understand death and taxes.

Ben Cowgill hangs on as one of a slowly disappearing cadre of solo practitioners, making good use of his SoloBlawg to dispense advice about practicing law in autonomous mode. In Are You a SANE Lawyer, he describes what it takes to succeed as a solo. Whether tax practitioners are sane has been debated, but few dare to venture out as independents.

Tax Folks Advertise, But What Animal Are They?

Back to f/k/a’s blog for a story about fall-out from last week’s decision by the Florida Bar Association declaring the use of a pit bull on an attorney’s letterhead in contravention of attorney advertising rules. It seems that pit bulls are too “ferocious” for such use, but that lions aren’t. This leaves the attorneys at Panter, Panter, and Sampredo wondering about the outcome of the investigation into their use of a panther silhouette, especially considering the fact that “the person in charge of lawyer advertising with the Florida Bar Association” characterized panthers as vicious.

OK, tax practitioners rarely are labeled as ferocious or vicious. See the earlier segment in this post, Yet When All is Said and Done, the Tax World is Rather Civilized. Meek and mild we are. Hah. So what animal should the tax attorneys use? Let’s see. The canary, because the IRS wants us to sing when they subpoena client records? No, that sends the wrong message. The duck? No, we’re not the profession that is afflicted with quacks. Here are my runner-up selections: The giraffe for those who prepare returns that are quite a reach; the halibut, for those whose prepare returns that are fishy; the chicken, for those representing the most cautious of clients. Here are the co-winners:.the goat, because we’re the ones that get blamed by clients unhappy with their final tax bill; the bull, because cleaning up after Congress plays with the tax law as we must do is pretty much the same as cleaning up after a bull.

Tax Blogs: Why?

About two weeks ago, on PrawfsBlawg, Linda Beale shared a well-written explanation of why she blogs about law and in particular about tax law. To paraphrase her essay, it gives us a chance to share our thoughts that we gather when we study a tax proposal. We provide a service by offering a place where readers can find links to original sources and other commentaries on the topic. Blogging can open up a forum for continued dialogue on the question. Linda’s blogging philosophy, including her comments on care and experimentation, should be valuable to blawgers from every place on the legal map even though she starts her blog journey from Taxland.

I like the proposition made at In-house Blog. Though dated, it is, like tax, timeless. According to Your Legal Duty to Blog, lawyers have much to offer and should be sharing their talents. I like the idea, which originated with Kevin O’Keefe of LexBlog, who put the idea in terms of a moral duty to blog.

Kaimipono Wenger’s classification of bloggers using the DSM on Concurring Opinions amused some and riled others. The only category I seem to fit is the possibility that I am delusional because I think blogging “counts as actual scholarship.” Sorry, some blogging surely is as good as, if not better than, what goes for scholarship in the world of scholars. Oh, and it’s usually much more timely. One person’s delusion is another person’s joy.

And when it comes to scholarship, or should I say the ostentatious hyping by law schools of selected faculty writings, examine what is at the moment the latest dialogue on the debate, published at ProfessorBainbridge.com, particularly the disagreement over the tag that some have placed on the practice. I won’t repeat the phrase in this post because I don’t want the search engines, my mother (who reads MauledAgain regularly), or the Villanova deans and faculty getting confused by something slipping into the wrong context. Just because tax is a three-letter word ending in x is no reason to.... Suffice it to say that there exist related words which could be used to describe what some tax practitioners and taxpayers do to the fabric of the tax law, and some very special phrases that could be crafted to tag what Congress continues to do to it.

Every Day is Tax News Day, Too

It would be much more difficult to blog tax stories if it were not for the contributions of those bloggers who function as tax journalists, bringing to the blogosphere’s attention the latest developments in the world of tax. The same can be said of those who have assumed a similar responsibility for other legal topics.

Almost every day I visit Paul Caron’s TaxProf Blog, which on Saturday celebrated its two-year anniversary. I must disclose I do have a symbiotic relationship with the TaxProf Blog, but that in no way reduces its value, as evidenced by the fact it had reached 1,475,753 hits when I checked it Saturday evening. What did take me aback was what happened when I put “maule” into the box for searching TaxProf Blog’s Topical and Chronological Archives and pressed the Enter key: up popped this tidbit from Google: Results 1 - 100 of about 36,500 from taxprof.typepad.com for maule. That’s 50 times a day for the two-year life of Paul’s blog. Fifty? Wow.

I also find useful tax news at Talking Taxes. This site carries much more state and local tax news than does the rest of the tax blog world.

For those whose primary focus is not tax, there are 27 other subject matter-related blogs in the Law Professor Blogs Network. At least 8 of them find me visiting from time to time, on a more or less regular basis. Fear not, these blogs are of great value to everyone practicing in the particular area, and are not restricted in access or utility to law professors. From time to time a posting might reflect something of little importance outside academia, such as an announcement about a new casebook being published, but the timely release of breaking news about cases, capsule summaries of newly-published articles, and similar items intended to keep law faculty up-to-date are equally as valuable to lawyers in practice. Look at the topics listed on the right-hand side of the page. If you don’t see what fits your practice, call a law professor friend who teaches in that area and use your powers of persuasion to convince him or her to start a new blog. Perhaps someday that blog will be invited to host Blawg Review.

As Tax Season Winds Down

The end of this fun parade of “tax is in there somewhere” posts is now passing my reviewing stand. One last entry from f/k/a’s blog, this time a hopeful look back at the newly discovered Dickens’ masterpiece, An Easter Carol. What the World History Blog calls a day of doom (April 17) inspired its conjecture about taxes being a contributing factor to the decline and fall of the Roman Empire. OK, so it’s not a law blog. It’s a nice reminder that not only will taxes be with us forever, they have been with us since the beginning.

On Saturday evening’s 11 o’clock news show on the local television station, a reporter did a story about April 17 taking the place of the usual April 15. She interviewed a preparer who promised that so long as someone came in by 11 in the evening on April 17, he could have their returns finished in time for filing by midnight. What will this guy do when someone walks in with a typical “more than a one hour job” shoebox? Does he think it’s as simple as the four-page form used back in 1913?

It’s a Tax Wrap

Little did I realize when I started MauledAgain 26 months ago that I’d find myself hosting Blawg Review. This being issue number 53 in a weekly series, that means Blawg Review has just celebrated its first birthday. Make that candle big and hold it high. Just don’t spill the wax onto the icing.

It has been a wonderful week of exploring blogs I had not previously visited and returning to some with which I was familiar. Despite the doubts and denials of those reluctant to wander into the land of law-related blogs, the world of lawyering is changing and in no small part that change has been reflected in and affected by what bloggers have been writing. I appreciate having had this chance to check in with few of my companion blawg adventurers.

Blawg Review has information about next week's host, and instructions how to get your blawg posts reviewed in upcoming issues.

Friday, April 14, 2006

When Political Correctness Met Form 1040 

It is with words that lawyers conduct their profession. And though many might think that it is with numbers that tax lawyers and other practitioners conduct tax practice, it is with words that they perform much of their work. As every law student learns soon after arriving in law school, if not already understood, the use of the wrong word can be devastating. Sometimes the use of the wrong word isn't so much devastating as it is misleading.

For example, for many years examples and hypotheticals involving tax compliance and tax planning for married couples focused on the husband. The pronoun "he" was used for the taxpayer. The husband would be the one with the higher, or only, income, and the one with the lion's share of assets. Until, of course, the estate planners did some "estate equalization" work.

Decades ago, the place for entering names on the IRS Form 1040 had two boxes, one labeled husband and the other labeled wife. The box for the husband was above that for the wife. When "newspeak" swept like a wave through the culture, and over the IRS, the Form 1040 was changed to reflect the more politically correct terms taxpayer and spouse. No longer would the male's name necessarily dominate the female's name, nor would any of the not-necessarily-so presumptions about relative income or wealth be reinforced by the Form.

Or so it seemed.

I don't think anyone has ever done an empirical study of how married couples filing joint returns place their names on Form 1040. I will guess that in most instances, perhaps almost all, the husband's name ends up above the wife's. Why? That's how tax return preparers almost automatically enter the information, and anecdotes, for whatever they are worth, confirm that the husband almost always is listed first. And, as the IRS warns in the instructions to Form 1040, "if you filed a joint return for 2004 and you are filing a joint return for 2005 with the same spouse, be sure to enter your name s and SSNs in the same order as on your 2004 return." Why? Apparently the IRS tracks the return using the SSN of the taxpayer whose name is listed first. Switching places gets the IRS computer very confused.

No big deal, right?

Yesterday, a subscriber to the ABA-TAX listserve posed a question. The subscriber's firm had prepared a federal income tax return for a married couple for whom the firm had not previously prepared returns. It seems that the wife had prepared the previous years' returns. On the 2005 return, the firm first listed the husband, and then the wife. The wife became very upset, claiming that her name should be first because she had put her name first on the previous years' returns and had done so because she made more money than did her husband. Then she challenged the preparer to "look it up in the code."

Well, nothing in the code addresses this question. I don't see anything in regulations or rulings, though researched rather cursorily, that prevents a married couple from choosing whose name goes first. The only restriction, as I've noted, is that once the couple decides which spouse's name goes first, they need to stick with that sequence lest the IRS computers balk. One responder to the posted question vouched that switching the names from one year to the next indeed does cause problems. I have first-hand knowledge that the IRS computer system struggles to deal with situations in which the first-named spouse dies and the survivor, formerly a second-named spouse on a joint return, then begins putting his or her name as the first and only name on a single or head of household return. So I would advise not tempting the IRS computer with a solution of "taking turns with the top line." That approach may be a fair one as between the spouses but it poses the risk of tax havoc.

It also makes no sense to determine which spouse's name is listed first based on income. If the spouse who has more income in one year becomes the spouse with less income in the following year, using income as the determinant would cause the same sort of name switching that makes the IRS computers go haywire.

Responses to the question at times were humorous. Perhaps the spouse who is most important to the preparer should be listed first. One preparer explained that based on this approach he lists his sister ahead of her husband, his daughter ahead of his son-in-law, but himself ahead of his wife. It also was suggested that the spouse who pays the preparer's invoice should be the first one listed. Ah, but what if they take turns with the tax return preparation bill each year? And does one base the determination on who paid last year's bill or this year's bill? What if they tell the preparer the wife is paying the bill, and after the return is prepared or even filed, the husband writes the check? Would the return need to be amended? Another preparer noted that the husband goes first "except if the numerical equivalent of the aligned planets at the wife's birth totals 13 or more," on the basis that this is as logical as some code sections.

Jokes and wisecracks aside, someone posed the question of whether the spouse listed as "taxpayer" and not as "spouse" could take advantage of the "innocent spouse" relief provisions of section 6015 if that situation arouse. Is the person listed as "taxpayer" on the return a "spouse" for purposes of the "innocent spouse" relief rules? My quick research indicates that the answer is yes. The regulations under section 6015 make the relief available to either spouse if that spouse meets the requirements for relief.

The problem with the switch on Form 1040 from "husband and wife" to "taxpayer and spouse" is that it labels one spouse as a taxpayer and the other one implicitly as not a taxpayer. Here's the law: by filing a joint return, BOTH SPOUSES ARE TAXPAYERS. Once again, the mis-use of words, in an attempt to avoid the politically incorrect "husband and wife," generates technically incorrect language. How about "taxpayer_1 and taxpayer_2"? That won't work because it suggests that any two taxpayers could file a joint return, weakening the government's position that domestic partners and live-together couples cannot file joint returns if they are not married.

Would returning to the use of "husband and wife" but putting the spaces for the names side-by-side rather than top and bottom eliminate the implicit domination-submission allegedly inherent in having a space for name of husband above the space for name of wife? Maybe. But perhaps there is something inherently wrong in having one name to the left and another to the right. Another problem lurks that triggers concerns of political correctness. Taxpayers whose origins are rooted in cultures where people read from left to right might think the name on the left is being given some sort of special position and those whose origins are rooted in cultures where people read from right to left might think the name on the right is being given some sort of special position. And for all I know, there may be some deep theological significance to how names are placed.

Perhaps this is one more reason to eliminate the joint return. Surely it is not the strongest, but perhaps tossing it onto the list of advantages to elimination of the joint return couldn't hurt. Alternatively, to the extent my long-standing proposal to let any two taxpayers file a joint return, whether they be married, domestic partners, live-in couples, two spinsters, or parent and child, removal of "taxpayer and spouse" would be necessary and would make this particular problem take on a different tone. Because people could switch "tax return partners" each year, the IRS would be compelled to do what it presently does not do, namely, tag and track returns under BOTH SSNs rather than the one attached to the first-listed name.

I suppose on the list of "important things that need to be done," this question isn't at the top. Of course, tying it into the issues of whether joint returns should exist, and if they exist whether they should be limited to spouses, lets this question get piggy-backed to a position higher than it otherwise would have. Hmm. I wonder if that would be offensive to the questions that it skips by on its way up the "important things to do" ladder?

Wednesday, April 12, 2006

Avoid Red When Doing Tax Returns? 

I love the Internet. I heard a story Monday yesterday on Philadelphia's radio news station, KYW but could not find the story on its web site. I told the story to my tax class on Monday to make a point, so finding it became essential lest I convince myself I had experience a delusion. After 20 minutes of using all sorts of search term combinations, I found it on a web site in Germany. One of the search terms I had used was "dollar" when it should have been "euro."

It turns out I had heard what I thought I had, currency denomination confusion nothwithstanding. What I had heard was a small portion of a bigger tale, on DW-World, that examined the impact of Germany's repeal of fixed dates for semi-annual clearance sales.

Headlined "How do you keep Germans from using their brains? A screaming red sales sign is a good start," the account begins with a bit of law news that had not previously past my eyes. I suppose that's one adverse consequence of not paying enough attention to comparative law. It seems that for almost 100 years, German law restricted clearance sales to the end of January and the end of July. In 2004, this regulation was repealed. Technically, it was an enactment of a law against unfair competition, which permits stores to pick their sales dates.

Enter the psychologists. According to the article, while some people looked forward to the possibility of sales throughout the year, others continued to shop at the end of January and the end of July. Apparently there are folks who delight in being able to praise themselves for having acquired something for a price less than that paid by some other person. Taking advantage of sales is some sort of badge of honor.

Enter the academics. A fellow named Christian Elger from the Clinic for Epileptology at the University of Bonn conducted a study. Preliminary results, deemed non-conclusive, suggest that the human brain " is much more active during regular shopping than it is during clearance sales." See a "sales" sign? The brain slows down. Hmm. I can list a few other things the sight of which causes the brain to slow down, but I'd best not start listing them.

Enter the news media. So some television journalists set up a test. Get some T-shirts. Price them at 1.60 euros. Put up a "huge sales sign" announcing a discounted price of 3 for 5 euros. Most of the people who bought shirts went for the three-for-five-euros deal. Of course, a moment of arithmetic tells us that the three-pack is MORE expensive than three individual shirts. OK, maybe the sales sign was deceptive and thus illegal? I don't know. I'm a novice at German law.

Enter my questions. What is it that makes simple arithmetic so difficult that the least bit of distraction leaves so many people vulnerable to being conned? Are the brain cells that do computations also the brain cells that go to work when visual distractions pop up? Is it easier to multi-task doing arithmetic and cooking rather than doing arithmetic and shopping? What impaired the ability of these shoppers' brains to conceptualize the meaning of a number? The color red? The word sales? The thrill of a seeming bargain fest? The t-shirts themselves?

How long will it take the con artists to put this discovery to work? Or perhaps, is academia discovering something that the street has known all along? Is there a lesson here for the tax world? Should we not do tax returns while visually distracted? Should tax return preparers avoid wearing red ties or having red decor in their offices?

Aha. Eureka! Perhaps now we know why accountants wear eyeshades!!!

Oh, and what was distracting me while I was hearing the story so that I ended up thinking dollars when I heard euros? Could it be that the reporter reading the story on KYW had said dollars? I wish I could find the answer to that question, but alas, I cannot.

Monday, April 10, 2006

Preparers Selling Tax Data: Where's the Good Reason for Allowing It to Happen? 

The debate about disclosure of tax return information by preparers rumbles onward. I expressed my dismay at the prospect of preparers selling client tax data, followed up shortly thereafter, and then simply asked, "So Why Not Just Come Right Out and Say, 'Do Not Sell Tax Return Data'?". In one of his commentaries on the question, Joe Kristan expresses the view that tax return preparers can sell taxpayer data under the existing regulations, and that the proposed amendments therefore do not add something that cannot already be done, thus leaving him a bit perplexed as to why I am so "irate." I'm not irate. I'm concerned, disappointed, dismayed, and disgusted. With all of that, there's no energy left to fuel "irate." Tax law and its absurdities rarely, if ever, deserve or get that sort of attention.

Joe points to current regulations that state: "If a tax return preparer has obtained from a taxpayer a consent described in paragraph (b) of this section, he may disclose the tax return information of such taxpayer to such third persons as the taxpayer may direct." Even the IRS is trying to defuse objections by claiming that the proposals don't change existing law, as Jeff Gelles explains in this morning's Philadelphia Inquirer Consumer Watch column, in what I consider to be a marvelous example of Washington bureaucracy engaging in damage control and spin artistry.

The simple fact of the matter is that the proposed language simply says "a tax return preparer may not disclose or use a taxpayer's tax return information prior to obtaining a consent from the taxpayer." No longer must the disclosure be "AS THE TAXPAYER MAY DIRECT." What is currently a two-prong test, requiring both taxpayer direction and consent, becomes a one-prong test satisfied by getting the taxpayer's signature on a document prepared by the preparer and not originating with the taxpayer.

The examples in the existing regulations illustrate this difference. The examples involve preparers who operate not only a tax return preparation business but also another enterprise, such as selling insurance or mutual fund shares or making loans. In each of the examples, the preparer wants to use the tax return information to process an application or proposal on behalf of the taxpayer and makes that desire known to the taxpayer. If the taxpayer provides, in writing, "the consent described in paragraph (b)" the preparer can use the tax information in its other enterprise. Nowhere is there any discussion of the taxpayer signing a blanket disclosure consent and the tax data being shipped off to data miners, identity thieves, or other nefarious groups.

It is too easy, under the proposed regulations, for an unethical preparer to slip a consent into the papers that the taxpayer is asked to sign. Removal of "as the taxpayer may direct" creates a huge risk that has no social value other than lining the pockets of preparers. Joe's opening example demonstrates the risk and the danger:
If you were shopping for a car, how would you feel if your friendly salesman went to the back room and came out saying, "You know, at your adjusted gross income level you could really afford this car with the LX option package and whitewalls. Oh, and I'm sure you have some borrowing capacity on your home equity line, so financing will be no problem!"
It is true that a preparer might "suggest" to the taxpayer that the taxpayer "direct" the preparer to sell the information. At this point, only the foolish or squeezed would do so. Why would anyone make their tax information available to unknown buyers or to the world generally? As Joe points out, politicians sometimes are "squeezed" into revealing tax and financial information that almost all of the people demanding such disclosures would determinedly refuse to do themselves.

Although, as Joe points out, there is nothing to stop a person from putting his or her tax return on the web, no one whose neurons are firing in proper sequence would do so barring some totally bizarre set of facts that would make for a wonderful but goofy law school hypothetical. Yes, I know people put all sorts of private information on the web -- read any web diaries lately? -- but even those folks pretty much stay anonymous. Joe asks if it is a big step from putting one's tax data on the web to letting the preparer market it? No, the big step is putting it on the web, something few, if any, would do, thus leaving sale of the data as a similar step that few, if any, would want their tax return preparers to do.

When Joe asks if the IRS should prevent consenting adults from posting their tax returns or letting their preparers sell their tax data, the answer is that the IRS should not enable PREPARERS to do so without the express direction of the taxpayer. The idea of preparers discounting their fee in exchange for a standard waiver of confidentiality is abhorrent if it is something sanctioned by Treasury regulations. The government ought not be enabling adhestion contracts.

Joe agrees with me that "collecting and selling 1040 information, even with consent, is sleazy" and then points out that "lots of sleazy things are legal." Sleazy is one thing. Surreptitious is an entirely different matter. Joe then reaches the same conclusion as I do: "I would like to see them keep preparers from selling information; the trick is to do so without keeping preparers from doing useful things like providing copies of returns to lenders."

Joe suggested that perhaps imposing "a 200% excise tax on proceeds of selling tax information by preparers would solve the problem nicely." Yes and no. These sorts of excise taxes are used in the tax-exempt organization and retirement plan areas. But they don't stand alone. They are used to backstop prohibitions. Joe has convinced me, though, to amend my proposal by adding a sentence at the end which will require Congressional action. My proposed language now reads:
No tax return preparer shall transfer or otherwise make available to any other person, other than the taxpayer, in any manner whatsoever, a taxpayer's tax information in exchange for money or other consideration whether or not measurable in money or money's worth. Any tax return preparer who does transfer or otherwise make available to any other person, other than the taxpayer, in any manner whatsoever, a taxpayer's tax information in exchange for money or other consideration whether or not measurable in money or money's worth, shall be liable for a tax equal to 200% of the proceeds of such a transfer.
Now let the advocates of tax preparer sales of customer tax data step to the plate and explain why the law should PERMIT such behavior. And if it already does, a proposition with which I totally disagree, that in and of itself is not justification; it simply means someone was asleep at the switch, or worse, last time around.

Friday, April 07, 2006

Is It Time to License Tax Return Preparers? 

Two recently-issued reports cast doubt on the overall quality of tax return preparation. Although most tax return preparers are honest, diligent, and capable, there are more than enough incompetent, dishonest, and/or lazy preparers conducting business to give the tax return preparation industry a bad name. It is unfortunate that in every profession the bad work of a few brings about regulation of the competent and honest many. As much as I dislike regulation, paperwork, and red tape, I must admit that the ideal world of minimum regulation can be achieved only if those existing in that word are themselves ideal. It's never been that way. It probably never will be. If it can be illegal to perform surgery without a license, should it be illegal to prepare tax returns without a license?

Consider the first report, issued by the General Accountability Office (GAO), and carrying the marvelous title of "PAID TAX RETURN PREPARERS: In a Limited Study, Chain Preparers Made Serious Errors." One wonders what an extensive study would find. The report's findings ought not come as a surprise, at least not to those familiar with the tax world. Consider the report's highlighted conclusions:
• not reporting business income in 10 of 19 cases;
• not asking about where a child lived or ignoring GAO’s answer to the question and, therefore, claiming an ineligible child for the EIC in 5 out of the 10 applicable cases;
• failing to take the most advantageous postsecondary education tax benefit in 3 out of the 9 applicable cases; and
• failing to itemize deductions at all or failing to claim all available deductions in 7 out of the 9 applicable cases.
What is particularly alarming is that aside from the third item, these shortcomings do not arise from the complexity or murkiness of the tax law. They arise from carelessness, deliberate attempts to curry favor with the customer, and perhaps simple ignorance. The GAO report explains that every preparer that its investigators visited made mistakes. Wow.

The GAO report presents a good explanation of how tax return preparers currently are regulated. Some are, some aren't. Those that are regulated are subject to different rules depending on whether they are lawyers, CPAs, enrolled agents, or just some person who decides to set up shop in the neighborhood.

On the heels of the GAO report comes another one, from the Treasury Department's Inspector General for Tax Administration. The report, which is not yet published on the Department's web site [edit: it now has been published on the Treasury web site], explains that approximately 22,500 licensed tax practitioners have not properly filed their own tax returns and/or have not paid their own taxes. Some who have been convicted of crimes or suspended by state bar or CPA regulators continue to represent clients in front of the IRS. Some who have not complied with the tax law in respect of their own returns also continue to represent clients in front of the IRS.

The recently-retired director of the IRS Office of Professional Responsibility claims that the Inspector General's report fails to give the IRS credit for changes implemented since the years from which the report draws its statistics. But unless the IRS comes up with information showing that these criminals, suspended lawyers and CPAs, tax cheats, and tax incompetents have been stripped of their license to practice before the IRS, there's no reason to get excited about changes in procedures or staff operating manuals.

Subjecting all tax return preparers to a uniform set of licensing and disciplinary rules adds another layer of government regulation and bureaucracy to the professional lives of many individuals. That's what happens when a few ruin what otherwise would be a self-regulated profession that would and could operated appropriately. It has happened in most other industries and professions, and it should and will happen to the tax return preparation business. What happens if it doesn't? The maxim that "one bad apple can spoil the barrel" will find another place to illustrate its meaning. The "success" of noncompliant, badly educated, and negligent preparers will tempt others to do likewise, perhaps for reasons of competitive edge. Preparers who can keep their fees lower because they don't spend money on continuing education have a market advantage that other preparers might consider deserving of imitation. When major league baseball did nothing about one steroid user, it eventually found itself in a situation where there were many steroid users, casting a dark shadow over the game. If the IRS or Congress fails to act now, an even darker shadow will fall over an industry whose quality, or lack thereof, has a direct impact on the raising of revenue by the government.

The tax return preparation industry has had years to get its act together. It hasn't done so. Time's up.

Thursday, April 06, 2006

A Taxonomy of Law Blogs 

Ian Best, a third-year law student at Moritz College of Law (Ohio State University), has published his Taxonomy of Law Blogs. Ian waded into the thicket of law blogs and the task of classifying them as part of a for-credit independent study law school project. What he produced is unique, useful, and most impressive. It is nice to see a seemingly simple concept evolve into a very useful resource.

Ian's Taxonomy must be a delight for e-librarians charged with cataloging blogs! Do we call that catablogging? Rather than force a blog into one category, Ian includes it in as many places as is appropriate. For example, MauledAgain "is in the following categories: General Legal Blogs, Tax Law and Law Professor Blogs." Ian shared the outline of his categorization, and to whet your appetite and encourage your visit to his Taxonomy pages, I've reproduced it below.

This much blog cataloging having been done, it should be easier for what all of us will be wanting: updates. Blogs arrive, blogs disappear. There are more of the former, so I expect the Taxonomy to grow. And grow. And grow. Ian could be sitting on the bring of a huge entrepreneurial success. He reports on his blog that he's already received an unsolicited invitation to a job interview because of his blogging. Effort is rewarded. I like that. I hope his employment leaves him time to keep the Taxonomy up to date.

Here is Ian's "main taxonomy page:"

A Taxonomy of Legal Blogs
I. General Blogs
Advice for Lawyers and Law Firms
General Legal Blogs
General Blogs – Law and Culture, Economics, Politics, etc.

II. Blogs Categorized by Legal Specialty
Specialty Blogs

III. Blogs Categorized by Law or Legal Event
Case Blogs
Statute Blogs
Trial Blogs

IV. Blogs Categorized by Jurisdictional Scope
State Blogs

Federal Circuit Blogs
U.S. Supreme Court Blogs

V. Blogs Categorized by Author/Publisher
Anonymous Blogs
Association Blogs
Blogs by Judges
Book Supplement Blogs
Class and Student Group Blogs
Institute Blogs
Law Firm Blogs – Listed by Blog
Law Firm Blogs – Listed by Firm
Law Journal Blogs
Law Library and Librarian Blogs
Law Professor Blogs
Lawyer Webjournals
Newspaper Blogs

VI. Blogs Categorized by Number of Contributors
Group Blogs

VII. Miscellaneous Blogs Categorized by Topic
Blogs about Judges
Event Blogs
Fictional Blogs
Humor Blogs

VIII. Collections of Legal Blogs
Blog Post Collections
Legal Blog Collections
Legal Blog Networks

Take a look. Browse. Discover the wide wide wonderful world of law and law related blogs waiting for your visit.

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